When is Chapter 13 Better than Chapter 7 for Personal Bankruptcy?

In some circumstances, Chapter 13 is the better bankruptcy option, even though it requires you to repay some or all of your debts over time.

Most people who have a choice between Chapter 7 or Chapter 13 bankruptcy choose Chapter 7. A Chapter 7 case is over in four to six months. You don't have to make any payments in Chapter 7. And, although you stand to lose any property you can't protect with an exemption, many Chapter 7 filers are surprised to learn that all of their property is exempt, and therefore can't be taken by the trustee.

Despite these advantages of using Chapter 7, however, there are circumstances in which debtors are better off filing under Chapter 13. This articles discusses some common situations that might make Chapter 13 the better choice.

You Want to Keep Your Nonexempt Property

In Chapter 13, you don't have to give up any property. Debtors who have valuable nonexempt property that they really want to keep often choose Chapter 13 for this reason. For example, if you inherited a vacation home that's been in your family for generations, it may have a lot of sentimental value to you -- and a lot of financial value to the Chapter 7 trustee, who would likely take it and sell it to distribute the sales proceeds among your creditors. If you file for Chapter 13, however, the trustee can't take the home, no matter how much it's worth. Although it may affect how much you have to pay in Chapter 13 (because you must pay at least the value of your nonexempt property into your plan), you won't lose the property.

You Are Behind on Your Mortgage or Car Note

When you file for Chapter 7, your personal liability to repay secured debts, such as a car loan or mortgage, is discharged. However, the creditor can still take back the property securing the debt, and that's exactly what it will do unless you can get current, keep up your payments, and most likely reaffirm the debt in bankruptcy (that is, agree that you will still owe it even after you receive your bankruptcy discharge).

If you file for Chapter 13, however, you can roll any missed payments into your repayment plan and pay them off over time. As long as you complete the required payments under the plan and stay current on the loan going forward, you will be able to keep the property. It's much easier to spread a few missed payments out over several years than to come up with all of the money you owe at once.

You Want to Cram Down a Loan

Chapter 13 gives you the option of cramming down a loan: reducing the amount you owe to the current value of the property. You can't cram down a mortgage on your residence, and you have to pay off the entire new amount in your repayment plan. These restrictions limit the usefulness of the cramdown remedy. However, it can be helpful. For example, if you owe $8,000 on a car that's worth only $3,000, and you want to keep the car, you could cram down the loan to $3,000, then pay it off a bit at a time in your repayment plan.

You Want to Protect Cosigners

If someone has cosigned a loan for you (for example, your parents cosigned your car loan or lease), your bankruptcy wipes out your liability for the loan. However, your cosigner remains on the hook. The creditor can come after the cosigner for the full amount you owe, even if your responsibility to repay has been discharged. If, however, you include the loan in your Chapter 13 repayment plan, your cosigner will be protected. The automatic stay will prevent the creditor from taking any collection actions while your case is proceeding. And, once your plan ends, you will have paid off the loan in full. (For more information on how bankruptcy affects cosigners, see Cosigners and Bankruptcy Obligations.)

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